Abstract

Policy makers and behavioural finance scholars express growing concern that marketing practices by financial institutions exploit retail investors’ behavioural biases. Investor protection regulation should thus address these marketing practices and include mechanisms curbing behavioural exploitation. That raises the question whether the marketing communications regime of the new Markets in Financial Instruments Directive can live up to this demand. This article develops a regulatory model that integrates behavioural finance insights into the new marketing communications regime. It then determines how regulatory authorities can apply this model when they interpret and apply specific regulatory requirements. It demonstrates how a regulatory authority or a court can translate empirical behavioural finance research findings into legal arguments when assessing whether marketing practices can significantly distort a model investor’s decision-making process. The article further establishes that the detailed requirements imposed on investment firms by the new Markets in Financial Instruments Directive are necessary in order to protect investors from behavioural exploitation. Finally, the article submits policy proposals that aim to protect investors more effectively from behavioural exploitation.

Highlights

  • Financial service providers devote substantial resources to product marketing

  • The marketing requirements enshrined in Article 44 MiFID II Delegated Regulation can serve as guidelines for interpreting Article 77 UCITS IV Directive,[6] which requires that marketing communications for UCITS shall be fair, clear and not misleading and which does not empower the Commission to adopt delegated acts.[7]

  • Article 24(3) MiFID II and Article 44 MiFID II Delegated Regulation are receptive to being interpreted in the light of behavioural finance insights about marketing communications exploiting investors’ behavioural biases if these insights (a) are compatible with the policy objectives of both provisions, (b) fit into MiFID II’s system of investor protection regulation and (c) are consistent with the investor model underlying both provisions

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Summary

Introduction

Financial service providers devote substantial resources to product marketing. These marketing communications have to satisfy certain regulatory standards, which have attracted only limited scholarly attention compared to rules about mandatory disclosure. This article situates MiFID II’s marketing communications regime in a behavioural finance context and aims to demonstrate how MiFID II’s advertising provisions can be interpreted in the light of empirical research about investor behaviour Such an analysis has not yet been provided in the literature. It determines how this regulatory model can be applied by regulatory authorities when interpreting and applying specific advertising requirements in Article 24(3) MiFID II and Article 44 MiFID II Delegated Regulation It shows that the detailed requirements imposed on investment firms by MiFID II’s advertising regime are necessary in order to protect investors from behavioural exploitation. It demonstrates how the existing legal framework can be optimised in order to achieve a higher level of investor protection informed by behavioural finance research findings. The article submits policy proposals based on research findings from behavioural finance that aim to protect investors more effectively from behavioural exploitation

The Need for a Behavioural Finance Analysis
Why Regulate Advertising by Investment Firms?
Representativeness Bias
Availability Bias
Framing Bias
Anchoring Bias
Emotional Bias
Influence on Investment Decisions
Protecting the Functioning of Financial Markets
Protecting Individual Investors
MiFID II’s System of Investor Protection
Deviations from a Purely Rational Investor Model
Investor Heterogeneity and the Model Investor
Financial Literacy
MiFID II’s Advertising Regime
Comprehensibility Requirement
Obligation to Provide Sufficient Information in Marketing Communications
Equivalence Rule When Presenting Benefits and Risks
Presentation of Past Performance
Clear Identifiability of Marketing Communications
Compatibility with ESMA’s Supervisory Approach
Conclusion
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